Republican seek to simplify state taxes; Dems say cuts will lead to larger deficit

AUGUSTA, Maine — The debate over taxes soon will take center stage in the Legislature as lawmakers on the budget-writing committee take up competing proposals to lower Mainers’ tax burdens.

Republican members of the Legislature’s Taxation Committee have come up with a plan they say would simplify the state’s tax code, lower income taxes for many Mainers and remove 70,000 lower-income individuals from the tax rolls altogether.

“In past attempts to address the inequities in the [tax] system, we’ve had to pick winners and losers. This system doesn’t do that,” said Rep. Gary Knight, R-Livermore Falls, co-chairman of the Taxation Committee. “Everyone comes out a winner with this system.”

But Democrats, who are putting forward their own tax cut proposals, say what the GOP isn’t telling the public is that the tax package will create an even larger budget hole beginning in 2013.

“It is very similar to spending now with your credit card and then worrying later about how you’re going to pay for it,” said Rep. Seth Berry, D-Bowdoinham.

After weeks of work, the 13 members of the Taxation Committee failed to reach consensus but, instead, have presented several proposals to lawmakers charged with crafting the next two-year budget, which begins July 1. Because the Maine Constitution requires a balanced budget, any fiscal holes created by changes to the tax code must be rectified during the budget-writing process.

The proposals will face close scrutiny from the Appropriations and Financial Affairs Committee as well as from Gov. Paul LePage, who in the past has threatened to veto any budget that contains less than the $203 million in tax cuts proposed in his two-year spending plan.

“I have told them that I am open to $203 million, minimum,” LePage said last week. “If they’ve got a better suggestion, fine.”

The centerpiece of the Republican proposal is a plan to eliminate three income tax brackets and, instead, move to a simpler, two-bracket system. At the same time, the committee endorsed higher exemptions and deductions.

Beginning next year, Mainers would fall within either a 6.5 percent or 8.5 percent tax bracket. In 2013, however, the top tax bracket would drop to 7.95 percent. Under the current system, the 8.5 percent income tax rate applies to individuals making roughly $20,000 and couples earning roughly $40,000.

The result, according to supporters, is that tax bills would vanish altogether for about 70,000 lower-income tax filers while Mainers, in general, would see their 2013 income tax obligations drop by an average of $343.

Under the GOP scenario, a family of four claiming a standard deduction would not owe taxes unless their income reached about $37,000 — up from $21,400 under current law.

“We believe this is as fair a proposal as we’ve seen in front of the Legislature, at least in our political careers,” Sen. David Trahan, R-Waldoboro, said last week during a press conference. “We have painstakingly [gone] through the tax code and tried to deliver a fair tax cut to every bracket that pays income taxes, and we believe we have achieved that.”

But Democrats suggested that, overall, the GOP plan disproportionately helps wealthy Mainers while expecting teachers, state employees and public retirees to pay more toward their retirement in order to help finance the tax cuts, as proposed in LePage’s budget. Additionally, they insist the Republican proposal creates budget holes that will need to be filled.

Because the reduction of the top income tax rate does not kick in until 2013, the financial effects of that change show up only during the last six months of the 24-month budget now under consideration.

Republican members of the Taxation Committee also have endorsed Gov. Paul LePage’s proposal to double — from $1 million to $2 million — the threshold at which the state can begin collecting estate taxes, also known as the “death tax.” But that change as well as other tweaks to the estate tax will not take effect until the next biennium.

Taken together, those changes translate into a $372 million reduction in tax revenue at a time when the LePage administration is proposing cuts to a popular property tax relief program and asking state employees and retirees to pay more out of pocket.

“That is something in this climate that I couldn’t agree to,” said Rep. Elsie Flemings, D-Bar Harbor.

Flemings said the Democrats on the committee want to reduce income taxes by adjusting the tax code so that Mainers can earn more before going up to the next tax bracket.

Additionally, Democrats have proposed expanding and making refundable the Earned Income Tax Credit, a federal tax program available to low- to moderate-income individuals and families.

Democrats also want to protect the circuit breaker tax program — also known as the Maine Residents Property Tax and Rent Refund Program — that now provides tax relief to more than 150,000 families. LePage’s budget has proposed reducing funding to the circuit breaker program by 20 percent.

“The package that the [Democrats] are putting forward will benefit primarily working Mainers and it will be paid for,” Berry said. “What you didn’t hear [from Republicans] is that the majority of their proposal is not paid for … and is a massive push into the next biennium.”

Democrats and Republicans on the committee were able to agree on several tax relief measures. For instance, the committee voted to exempt all Gulf of Maine fishermen from the sales tax on fuel in an attempt to draw more fishermen to unload their catches in Portland rather than in Massachusetts.

Committee members also agreed to eliminate the 7 percent charged on meals served in retirement facilities.